Comments on Performance and Fee Structure (Part 1)
Posted by Mark on April 5, 2018 at 06:34 | Last modified: November 29, 2017 06:18Today I continue discussing comments on Dr. Mark Perry’s July 2014 blog addressing the Jason Zweig post.
> this gets badly exacerbated by the fact that commissions have
> dropped like a rock. trading commissions are down maybe 90%
> since the late 90’s…
>
> this has… driven… better advisers into other businesses (like
> hedge funds… to get profit share, not trading commissions),
> which has taken the cream (and then some) off this group…
Thereby “dumbing down” performance as a result of going cheap with investment expense?
> if you get 3 times the fee for recommending an active fund and
> 10 times for selling life insurance or annuities, the adviser
> now has his incentives set up in opposition to his or her client.
>
> they sell you what’s profitable for them, not for you.
Isn’t the fiduciary standard supposed to prevent this? To be discussed at a later time…
> so, the guys that are really good investors leave the business,
> and the guys who are good salesmen stay but have incentives set
> up opposite yours.
Here again is the idea that advisers* are salespeople rather than knowledgeable/experienced investors (mentioned here, here, and here).
> this is a space one needs to be VERY careful with.
>
> most of the folks in it are not adding any value and would not be
> paid to do so even if they could.
This is an interesting reference that echoes my previous discussion of how difficult it is to generate solid performance.
Another reader replied:
> …Guiding clients into one of three or four risk categories and then
> publishing the results of each category solves the tailoring problem.
I certainly agree that all clients do not need to be different. I will address this in another post.
> Clients should not be self-directing. Company stock, large amounts of
I’m not sure why he would discourage self-directed investment activity. I encourage this for anyone looking to improve financial literacy while performing better than most of the “professionals” because with knowledge and experience I certainly believe they can.
> cash for real estate, and other unique holdings can be segregated
> into a holding account that is not included in the performance report.
> Even brokers can charge flat fees now, so commission incentives should
> be a thing of the past.
I agree. I also think the incentive to outperform run-of-the-mill robo-investors or passive index strategy approaches must be provided as something more than a bare-bones management fee to make these advanced efforts worthwhile.
>
* “Financial” or “investment,” which I think are used interchangeably even though the latter has a legal definition (and more>
appropriately refers to representatives rather than IAs themselves